Medical marijuana dispensaries: High-tech tracking system unfulfilled

Grower Kristina Imperi prepares marijuana plants for the next stage of their growth in an indoor growhouse in Denver. (Joe Amon, The Denver Post)

The technology was supposed to efficiently track medical marijuana from seed to sale — the catch-phrase that came to define Colorado's efforts to regulate what had been an outlaw business.

Field investigators could walk into any dispensary or grow operation and with a digital reader instantly collect data from tags attached to everything from newly potted plants to pot-infused lollipops.

In July 2011, the state Medical Marijuana Enforcement Division signed a $636,000 contract with a Florida company to build the system using Radio Frequency Identification, or RFID, technology.

About nine months later, the project was shelved because of a budget shortfall — just one unfulfilled promise in a regulatory system often held up as a national model and serving as the foundation for how the state will regulate recreational pot legalized by Amendment 64 last fall.

The challenges of starting an agency from scratch, a lack of stable funding, staff cutbacks and balancing public safety concerns with the desires of an industry looking for legitimacy all have complicated efforts to regulate Colorado's Green Rush.

"The expectations were too high," said Marco Vasquez, who retired this month as the division's enforcement chief. "We had a champagne wish list on a beer budget, and we were never going to get there."

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Three years after legislation established a strict system for regulating a commodity that remains illegal under federal law, businesses are expected to follow the rules, but a thinned group of regulators lacks many of the tools to enforce them.

Technology allowing regulators to connect to the Internet and monitor businesses' surveillance cameras around-the-clock never materialized, independent testing of products allowed by state statute has yet to happen, and a team of auditors that was to sift data and identify potential problem businesses was disbanded.

At the same time, some medical marijuana businesses have been allowed to operate since 2010 while their license applications are pending. Vasquez and others say operators who would not pass background checks likely have exploited that, although a division spokeswoman says all applications have undergone some scrutiny.

Critics — especially law enforcement — call Colorado's regulation an honor system. But supporters, including medical marijuana entrepreneurs who support tight regulation, believe the consequences of breaking the rules keep the industry in line.

"We are still the best example of regulation," said Denver dispensary owner Jeremy Heidl, who also has a stake in marijuana-infused product company Organa Labs. "This is a very young and immature industry, and kudos to us for taking on something that hasn't been tackled anywhere in the world, really. It's a monumental task. If I were to give it a letter grade, it would be a solid 'A.'"

In a warehouse district in central Denver, employees wearing powder-blue gowns, hairnets and gloves lean over freshly harvested marijuana plants, carefully pruning the flowers with scissors.

A computer in the corner runs a software program, MJ Freeway, that captures 36 data points — date of harvest, strain, plant ID, batch ID, weights of the product at various points in the process.

Three high-definition cameras perched like black-eyed insects watch from above, the digital video preserved on a DVR on-site and backed up on the server of a security company.

This is the trimming room above Colorado Harvest Co.
, one of the last stops on a marijuana conveyer belt. Here, workers pluck flowers that will be sold in jars at affiliated dispensaries. The trim will be dried and processed into oil for Organa Labs products such as tablets and a pen-like vaporizer that resembles an electronic cigarette.

Not everything here is required by the state — the special garb is an added touch, and not all the data must be documented, said Ralph Morgan, who left a career in health care equipment sales to open a dispensary, Evergreen Apothecary, in 2009.

"MMED has come many times," said Morgan, 39, also a partner with Heidl in Organa Labs. "We beg them to come. If you are going to have us put up all these cameras, get down here."

The state put up many barriers to those wanting to make it in an industry like none other.

For years, there had been little reason to do anything. Dispensaries appeared en masse in 2009, after state health department officials dropped efforts to cap how many patients a caregiver may have and a deputy U.S. attorney general signaled the federal government was unlikely to crack down on medical pot.

In 2010, longtime Department of Revenue enforcement official Matt Cook set about to craft legislation and a rule book governing the industry. Cook borrowed from laws regulating horse racing, casinos, alcohol — even card-dealing.

"There were 1,100 businesses out there unregulated," Cook said. "There was no oversight, no regulation. No one really knew what to do."

The resulting playbook pleased neither law enforcement officers, who see no benefit to legalizing marijuana for any use, nor medical marijuana entrepreneurs, who thought the cost and difficulty of following the rules would run the industry into the ground.

Required were costly fees, criminal background checks to weed out convicted felons, proof of Colorado residency and years of financial statements. Business owners would need to send the state shipping manifests and blanket their operations with surveillance cameras.

The newly minted Medical Marijuana Enforcement Division set up shop in offices at a greyhound racing park in Commerce City.

Over one summer weekend in 2010, the office took in more than $8 million in application fees, almost all of it cash, said Vasquez, the division's former enforcement chief.

"From Day 1, we were drinking out of a firehose," said Vasquez, a former Denver Police deputy chief and Sheridan police chief.

Field investigators started off meeting with about 90 businesses that had failed to show they were growing 70 percent of the marijuana they sold — a mandate meant to better account for pot in the system.

The vetting of license applications was supposed to take a year but dragged on "because so many in the industry who had applied had issues with their background — back taxes, improper paperwork," said Paul Schmidt, a former division deputy director, also in enforcement. "Boy, wouldn't you think that is strange? Actually, no, not at all. This was something that was illegal last week and legal this week."

Even before the division's staff was reduced, "we would have needed more people than we had," Schmidt said.

In 2010, state legislators placed a moratorium on new business applications so the division could catch up on processing other applicants who were already in business but not yet approved. The moratorium was extended in 2011. As a result, the division was forced to stretch operating expenses budgeted for one year over two.

The division shuttered its three satellite offices and began layoffs last April that slashed its staff from 37 to 15. The number of field enforcement officers fell from 14 to six. Under statute, the division originally was supposed to have 80 employees.

The audit section — which was leading the radio-tracking system implementation— was eliminated. Vasquez said auditors were to pore over data, including patient lists businesses provided monthly, to identify potential problems in need of more attention.

"We have been behind from the beginning because we had a very steep timeline," said division spokeswoman Julie Postlethwait. "The budget shortfall and the staff cuts were a big blow across the board."

All the work to make the high-tech checks a reality — the radio tracking and monitoring of surveillance cameras — came to halt.

Vasquez said there "really isn't" a seed-to-sale monitoring system in Colorado. Medical marijuana businesses are still required to tag and track their products, and state officials can still inspect those businesses, but with far fewer bodies and no high-tech tools.

"I don't think anyone intended to mislead," Vasquez said. "The intentions were good. The devil's in the details."

Vasquez said the cuts meant fewer random compliance checks or undercover operations to prevent medical marijuana going to nonpatients. The division couldn't take advantage of training it received on sniffing out money-laundering and organized crime, either, he said.

"I envisioned more complex investigations and going after people in the criminal element of the business and locking them up," he said.

Vasquez said the gutted division still made an impact — including conducting inspections that caused some businesses to withdraw applications because they were so far out of compliance.

"The rap from law enforcement is MMED hasn't done anything with enforcement," he said. "Well, we are doing enforcement, but it doesn't mean we're filing criminal charges and putting handcuffs on people."

Since its inception in 2010, the division says 696 license applications have been approved, 144 have been denied, and 905 have been withdrawn. Another 634 applications are still pending.

Nearly two-thirds of those denied applications were rejected because businesses couldn't clear the bar of obtaining local licenses in their respective cities or counties. Most of the rest could not certify they were growing 70 percent of the marijuana they sold.

In 2011, for instance, Mother Earth Medical Marijuana Center in Carbondale was shut down after an undercover bust by a regional drug task force. Authorities had been tipped the center was selling to people without medical cards, as well as selling cocaine.

The backlog in processing license applications — and fully vetting the applicants — remains an issue.

Kevin Merrill, assistant special agent in charge of the Drug Enforcement Administration's Denver field division, said his investigators are aware of many instances of operators with pending license applications who would not qualify because of criminal records, failure to meet residence requirements or because they have registered the business in another name while they are in control.

He declined to elaborate, citing ongoing investigations.

"I am not aware of any other business model where you grandfather in people without a license," he said. "A lot of them are just subverting the system."

Both Vasquez and Schmidt agree such scenarios are likely.

Postlethwait said initial investigations on all applications are "materially complete" and awaiting resolution of least one issue, such as local authority approval or changes to the original application.

She said while it is possible applications in the pile would not pass muster, "every single one of these applications has been looked at, and there has been a review of the owners involved."

Postlethwait said an exception may be if ownership has recently changed, which is common in the industry.

"We do have a lack of resources," Postlethwait said. "But we have people out there basically working 10 to 12 hour days every day, people going to do site visits every day. There is regulation taking place. I am comfortable enough saying that if there is something really egregious going on, we would know about it. The large majority of owners in these businesses are doing the best they can to be compliant."

The state auditor's office is scheduled Tuesday to release a performance audit of the Medical Marijuana Enforcement Division.

Postlethwait said the division has changed "processes and procedures" and taken other steps to improve its financial stewardship. She said she could not elaborate because she signed a confidentiality agreement, which the state auditor's office required.

Kevin Fisher, co-owner of Rocky Mountain Remedies in Steamboat Springs, said that even with fewer field investigators, the division's ability to sweep in at any time keeps centers on their toes.

"We as responsible operators want more boots on the street looking into more things," said Fisher, chairman of the Medical Marijuana Industry Group, a trade association. "I don't think it's perfect. It does need to be better funded. Do I think things fall through the cracks? Sure. Do I think it's systemic? No."

Cook, the architect of Colorado's regulatory system, said it's notable the federal government has not intervened since the regulations came on the books.

"I don't want to say it's tacit approval, but they haven't done anything here, for whatever reason," said Cook, now a consultant to the medical marijuana industry. "I believe in the regulatory scheme. It's very valid, very helpful, and it absolutely will work."

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